In the build up to the EU-Russia summit, Carnegie Europe hosted scholars from Carnegie Moscow, as well as senior European officials and experts in a half-day seminar on the key issues affecting Russia-Europe relations.

Economic Reform: A Prerequisite for EU-Russia Cooperation?

Russia has been the hardest hit of the BRIC economies by the economic crisis that started in 2008. The country’s long-standing needs to modernize and diversify its economy, strengthen its financial sector, and improve its investment climate have been brought into sharp focus. The Russian state and its leadership face an enormous challenge to make an economic partnership with the European Union be a transformative one.

Energy Resources

Energy Cooperation: There is increasing scope for cooperation on energy issues between Russia and the European Union, Carnegie’s Adnan Vatansever explained. The existing Russian economic model, a political economy of rent based on the distribution of oil and gas revenues, is severely strained, and Russia is now in need of more foreign investment.

The Gas Sector: There is currently a glut in the global gas market, Vatansever said. This has an adverse affect on major Russian providers such as Gazprom. In addition, Gazprom is suffering from increased competition in the international market, and a lack of international clients. In light of this, Europe will remain the main buyer of Russian gas.

Energy Efficiency: Russia, Vatansever commented, has started to take the issue of energy efficiency very seriously. This is an area where both Russia and Europe could benefit. From a Russian perspective, reducing domestic demand through increased efficiency will alleviate some of the strain put on its gas industry to increase production. From a European perspective, this will free up a significant chunk of Russian gas for export to the European market.

The Russian Economy

No Recovery: In 2009 Russian GDP fell by roughly 8%, Carnegie’s Sergei Aleksashenko explained, and there is currently no indication of an economic recovery. Growth in the Russian economy between 2003 and 2008 was not based, as many believed, on oil and gas revenues. It was in fact linked to foreign borrowing. Loans dried up when the financial crisis hit, and many Russian industries and firms lost their source of financing as a result.

Budget Restructuring: The economy, Aleksashenko continued, has also suffered due to budget restructuring. In the period between 2008 and 2010, the portion of the budget dedicated to pensions, social benefits, and other types of allowances increased significantly. From a macroeconomic perspective, this kind of government expenditure is not as favorable to economic growth as investment in public expenditure would be.

Modernization and Innovation: Following the economic crisis, Aleksashenko explained, Russian President Medvedev made it clear that what was needed was modernization. Not the comprehensive modernization of the economy and political system that many Russians hoped for, but rather, a modernisation limited to certain key sectors of the economy. This is why both Prime Minister and President now refer to ‘innovation’ when speaking of the economy, and not ‘modernisation’. Fundamentally, the government is not willing to change the rules of the game.

Foreign Investment: Russian leaders have adopted a contradictory position toward foreign investment. On the one hand they openly claim to welcome it, Aleksashenko commented, while on the other they have no intention of improving the climate in Russia for foreign investors. There are currently three major barriers to foreign investment that the Russian government is doing nothing about: rule of law, corruption, and intellectual property rights. This discourages foreign investors, and particularly European ones.

EU Policymaking

A Single Gas Market: The current situation in Russia, which is characterized by greater state monopolization of the economy, control of the energy sector, a move towards more protectionism, and the use of energy as a foreign policy tool, does not bode well for the EU, said Iana Dreyer, Trade Policy Analyst at the European Centre for International Political Economy (ECIPE). Unless there is a substantial shift in policy in Russia, the EU will not be able to start talking to it seriously unless it achieves one thing, a single gas market.

Divisions within the EU: There is fragmentation in the EU’s gas market along national lines; countries have varying degrees of dependence on Russian gas. This has led to strong divisions within the EU, and the inability to formulate a coherent approach to Russia.

From Vancouver to Vladivostok: A Common Euro-Atlantic Space?

Twenty years after the fall of the Berlin Wall, the United States, Europe, and Russia have yet to devise a stable, long-term security arrangement. The reset in US-Russian relations and improvement in NATO-Russia coordination have brought forth new opportunities, but Moscow’s own strategic viewpoint remains unclear. Russia is now contending with challenges to its foreign policy and regional identity from emerging regional powers such as India and China, and efforts to advance Euro-Atlantic security dialogue are being increasingly hampered by its problematic history with many Caucasus republics and neighboring states.

Changing Russian Policy

Russian Reform: The inter-relation between domestic politics in Russia and Russian foreign policy is more significant today than ever before, Marie Mendras, Director of the Policy Planning Staff at the French Ministry of Foreign and European Affairs, explained. It will be very difficult for the EU to develop a productive relationship with Russia if there are no significant changes in the way that Russia is ruled. That is to say if actors other than President Medvedev and Prime Minister Putin remain unable to participate in reforming and modernizing the economy, and serious economists remain uncritical of the government.

Frozen States: Mendras identified a group of states that she referred to as ‘frozen’ states. These are former soviet republics, such as Moldova, Georgia, Ukraine, Belarus, Armenia and Azerbaijan who are neither in an alliance with Moscow, nor members of the EU or NATO. Today, these countries find themselves with fewer prospects of developing sovereign policies than they did a decade ago. While there was once momentum towards these states integrating with either the EU or NATO, the 2008 conflict in Georgia largely quashed those efforts. As long as Moscow’s policies with regard to these countries, and particularly Georgia, do not change, it is difficult to envisage any significant developments in Russia-EU relations.

Neighborhood Policy: To make the most of regional opportunities, and to overcome certain regional limitations, Russia needs to reassess its policies in its neighborhood, said Pierre Morel, European Union Special Representative for Central Asia and European Union Special Representative for the crisis in Georgia. So far these policies have been handled in a short-sighted and obsessive manner.

Russia and the EU

Relations with the United States and the European Union: It is far easier for the United States than the EU to identify a clear set of strategic aims based on which a reset of relations with Russia could be envisaged, stressed Mendras.

Focus on Bilateral Relations: The EU’s relationship with Russia is fragmented, with each member country maintaining its own relations, Mendras explained. As a result it is very difficult to come to common positions on Russia within Europe.

Equal Partners: Europe should not seek to establish itself as either a model to be emulated by Russia, or as a competitor. Europeans and Russians have lived side by side for centuries, Morel explained, and should seek to act as partners.

Russia-Poland Relations: There has been a realization in Russia, Carnegie’s Dmitri Trenin added, that unless the government treats Poland as a serious country, with a degree of respect, there will not be a chance of a better relationship with the European Union as a whole.

Security Architecture in Europe

Fragile Security: European regional security has progressively improved over the two years since the end of the war in Georgia, Trenin explained. However, simply because it is currently going through a good patch doesn’t mean that the relationship has been fundamentally transformed, and it is important to realize that European security is still fundamentally fragile.

Obama’s Foreign Policy: The reset by President Barack Obama of American foreign policy, Trenin explained, has had some profoundly positive effects. His de facto halt of the expansion of NATO to the east, more nuanced approach to Georgia’s President Saakashvili, and reconfiguration of U.S. ballistic missile defenses in Europe have all sent a less provocative message to Moscow than that of his predecessor.

The Conflict in Georgia: The situation in Georgia, Trenin continued, still has the potential to threaten European security. However, Russia cannot be perceived as the sole source of insecurity. What led to the conflict was a situation of reciprocal provocation.